| There is a lot of talk of inflation in the | | | | shortening demand and lowering prices on |
| economic news lately. What does it mean? | | | | items. |
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| Most of us understand the basic idea of | | | | For the most part, steady inflation is not |
| inflation -- things cost more than they used | | | | seen on a day-to-day basis. You usually only |
| to. In fact, that is pretty close to the | | | | see it when you look back. I remember that 85 |
| Webster's definition. It is when prices go | | | | cent gasoline in high school. But you made a |
| up. For example, I remember when I could put | | | | lot less in your job as well. |
| five dollars of gas in my little truck and | | | | |
| drive for a week. Nowdays, five dollars gets | | | | Why is inflation important to the individual? |
| me less than two gallons of diesel. | | | | Well, when you are planning for the long |
| | | | term, it can hurt you a bit. |
| Inflation is at work. | | | | |
| | | | If you are 30 year old, you are around 30 |
| Inflation has been pretty steady. Just a nice | | | | years from retirement. You plan to retire at |
| climb. In general, inflation has remained at | | | | 60 with a million dollars. That sounds like a |
| an average of 3% for the past 30 years. We | | | | lot of money. |
| aren't doing that bad -- some countries have | | | | |
| inflation above 1000% in one year. | | | | It may not be. |
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| Yes, sometimes it jumps, like in the 70's. | | | | Factor in 3% inflation for 30 years and your |
| But in general, we are doing well. | | | | million dollars will only buy you around |
| | | | $400,000 worth of goods and services. If you |
| Okay, what causes inflation? | | | | live 20 years after retirement, that's only |
| | | | $20,000 a year to live on. |
| Inflation can be caused by many factors. | | | | |
| Increases in taxes and government fees can | | | | Sixty percent of your money has gone to |
| lead to inflation. Things that cost | | | | inflation. Can you live on that? You will |
| businesses especially cause inflation. When | | | | need to save approximately $1.8 million and |
| the cost of a business goes up, the product | | | | invest it at 5% after retirement in order to |
| prices go up. When prices go up on products | | | | have the same amount of spending money as you |
| and services, your income goes down (you are | | | | do now. |
| spending more of it). You have to work harder | | | | |
| and longer to afford the same things. Or hope | | | | So remember, inflation does really affect |
| that you get a cost of living adjustment. | | | | you. You should consider it when planning for |
| | | | the future. Other than that, there isn't much |
| Which causes the business costs to go up and | | | | you can do. But you must factor it in. |
| it all starts over again. | | | | |
| | | | A quick way to factor in inflation is to |
| Inflation also occurs when your personal | | | | subtract the 3% inflation rate from your |
| taxes, property taxes and sales taxes | | | | assumed rate of return. For example, if you |
| increase. You ask for an increase in your | | | | expect a 13% return on your investment, |
| wages. Then business costs go up and so on. | | | | inflation takes it down to a 10% rate of |
| | | | return. This will give you a picture of the |
| When things become rare, inflation can occur. | | | | value of your investment. |
| The more demand on an item, the more | | | | |
| expensive it becomes. For example, if there | | | | There are investments out there than benefit |
| is a drought and wheat does poorly, the price | | | | from inflation, such as real estate and |
| of wheat goes up. This may cause the price of | | | | precious metals. Look into diversifying your |
| wheat products to go up. | | | | portfolio into different types of assets, not |
| | | | just different types of stocks. |
| If interest rates increase, inflation can | | | | |
| also occur. The cost to borrow money goes up | | | | Inflation is simply a fact of life. By |
| for businesses, increasing their cost and so | | | | accounting for it, you are prepared to fight |
| on. However, higher interest rates also | | | | it in the future. |
| encourage people to save more and spend less, | | | | |